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It is a great time to buy a new home. It’s an exciting and rewarding process, and with the right information, tools, and resources, it can be a surprisingly comfortable experience. Buying your next home is a big decision. It should be seriously thought about and prepared for the potential financial and emotional effects. But it doesn’t have to be so hard.
We’ve compiled our best tips and tricks, from saving up for your house down payment to making sure you get the most out of your mortgage interest deductions.
It is hard to be a pro these days while the housing market is swinging like a rollercoaster. The government is not making it any easier with constant updates on rate and mortgage qualification policies that tamper with the housing market.
Even if you’re in the market for your tenth, fifth, fourth, or third home, or you are just a sophomore trying to buy your next home, you’ll notice that the house prices and, thus, mortgage qualifications are more difficult now than it was the first time around.
This is why you need expert guidance.
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Here is everything you need to know about buying your next house in Canada. Whether the new house is for your new principal residence, second home, or vacation, you will learn tips and tricks for getting approved for the right mortgage loan at the lowest mortgage rate from these guides.
This complete guide has everything you need to know about buying your next house, from planning to closing and everything in-between.
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Owning a house is part of our Canadian dream, but simple mortgage mistakes can affect your ability to achieve that house ownership dream.
Have you ever wondered how some people make their house buying and selling process easy while others struggle with it?
A credit score is an important element in qualifying for a mortgage. Bad credit scores for mortgages are those below 620.
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Getting pre-approved for a mortgage is essential before starting your new house.
This ensures that sellers will accept your offer because it’s clear that you have financial backing.
It also means that when homes come on the market, whether they are listed with realtors or private owners, you’ll view them, knowing exactly how much house you can afford.
If possible, try and get approved for more than what you think you would be comfortable spending, so if an attractive property comes up at or below budget, there won’t be any surprises later down the road.
Working with a real estate agent is not required; however, it’s highly recommended even as a pro-house owner.
Housing marketing keeps changing. You don’t know what awaits when you kick off your house shopping.
Expert advice and guidance are always necessary when trying to buy your next home.
Trust me. You’ll have a lot of questions to ask. Your real estate agent is the right one to answer those questions.
In addition to giving advice, a real estate agent is likely to have a broad network of other professionals (house inspectors, mortgage insurers, mortgage brokers, and house appraisal agents) you need for a smooth house buying experience.
When choosing a mortgage, there are many things to consider, including total borrowing costs (interest rate and fees), repayment schedule of the loan, the lender, and how the mortgage terms fit your current and future situation.
You have to consider different mortgage options, but the most common ones available in Canada are variable-rate and fixed-rate mortgages.
The mortgage rate for variable mortgages adjusts with the market, whereas the mortgage rates for fixed mortgages stay the same throughout the mortgage term.
Once the conditions are fulfilled, and the loan is cleared for funding, the lender will wire the money to your lawyer. On the closing day, your lawyer will complete the Title registry with the City. This involves registering you as the new owner and the lender as the lienholder of the property.
Once that is done, the lawyer will disburse the funds to the different parties as required – seller, buyer, and the real estate agent (sales commission). The lawyer will also provide you with the keys to your new home.
How much of a down payment you need for your next home will depend on the following variables (What makes it more complicated is that these variables are interwoven):
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The house’s value or purchase price will determine your down payment ratio.
In Canada, you must put down a minimum of 5% of the purchase price if the house price is $500K or less.
For houses up to $1 million, in addition to the earlier 5% rule, you need an additional 10% of the property value over $500K but less than $1 million.
You need a minimum of 20% of the house price for properties priced at \$1 million and above.
The above criteria are for individuals with credit scores above 600, excellent credit history, and conformable income sources.
For bad credit mortgages and self-employed mortgage loan solutions, you will need to put down a minimum of 20% of any house price to qualify for a mortgage loan.
Lenders use credit scores to classify mortgage applications by the risk of default. Lower credit indicates a higher default risk.
Your credit score also affects the type of lender willing to consider your application.
Look at mortgages with alternative lenders if you have a bad credit score.
Alternative mortgage products are not eligible for default insurance. These lenders will require that you put down a minimum 20% value of the purchase price and only fund up to 80% of the purchase price.
Good credit allows you to qualify for default insurance, which helps you qualify for a low down payment mortgage if your house price is less than $1 million—credit flexibility in the type of mortgage loans and which lender you want.
Luckily, approvU helps with whatever your credit situation, bad credit or good credit.
Higher credit scores indicate lower default risk.
The lenders will want home equity with a lower credit score if your down payment is more down.
How do you want to validate or confirm your income?
You must pay back the borrowed amount by making consistent monthly payments. Your lender helps determine if you can make the required monthly payments.
Your income can come from being employed and working full-time, earning a consistent salary every week, bi-weekly or monthly, or you are not permanently disabled, receiving monthly disability payments, or are retired and on a monthly pension.
This type of income is easy to validate by reviewing your employment letter, paystub, T4 statements or Notice of Assessment, or bank statement showing consistent deposits of this amount.
The end of the spectrum is self-employed. Some small business owners do not have the resources to employ a full-time accountant or bookkeeper; thus, their business’ financial books are not in order.
Given the guidelines by which traditional lenders like significant banks operate, it is hard to validate this income source.
With self-employed income, your best bet for an easy and fast mortgage approval will be going with an alternative lender. These lenders have flexible income qualifications and underwriting criteria.
As mentioned above, you will need at least 20% of the property value as a down payment if you buy your next home with a self-employed income.
How you use the property is another variable to determine your minimum down payment.
Generally, if you’re buying the house for rental purposes, you must put down at least 20% of the purchase price, regardless of your income type, credit score, or lender type.
The lender may require you to put down if you are applying with a bad credit score or self-employed income.
On the other hand, you don’t need to put that much money down for a down payment if you buy your next owner-occupied, vacation, or second home property.
If insured, you will go by the 5%, 10%, and 20% rules. But if not issued, the minimum down payment required will be 20% of the purchase price.
An insured mortgage loan or uninsured mortgage might be a personal choice too, which will impact how much you will require to put down to buy your next home.
Default insurance is a cost. CMHC and other private companies – Sangen and Canada Guaranty- provide default insurance. This insurance protects the lender if you default on your mortgage loan. You may choose not to opt for this additional cost even if you qualify.
This is an optimal choice, primarily if you have just sold your existing home and have enough money to purchase your next home.
Without default insurance, the lender is left to bear the default risk if the unforeseen happens if you cannot make your required payment.
To reduce this risk, lenders want you to put down more of your own money to reduce the loan needed to buy the property.
But if you choose to go for an insured mortgage, your application will be reviewed and underwritten based on the guidelines of the default insurance provider, which may limit how much house you can buy.
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Closing costs add up fast, especially in the high house-price environment.
Also, given that you are not likely to qualify for most or all of the rebates and tax credits you had when you bought your first home, anything you can do to save on the closing costs for your second home will help ensure that you step into your new house on time and budget.
You can do a few things to help reduce closing costs.
Mortgage porting means transferring the mortgage on your existing home to the new house.
All the conditions and remaining terms of your current mortgage, including the interest rate and prepayment privileges, will be carried over to your new home’s mortgage. This is beneficial, especially if the mortgage rate you are offered is higher than the rate you have for your current mortgage.
You won’t be charged a penalty since you are not breaking your existing mortgage contract but simply moving it to your new house.
If your new house requires a bigger mortgage than the outstanding mortgage balance on your current home, then your lender may allow you to increase the existing mortgage to what is needed to enable you to buy your new home in a process called mortgage blending.
The new mortgage rate for this new loan will blend the old rate and the lender’s new mortgage rate offer. You save prepayment since you are not breaking your existing mortgage contract.
A prepayment fee may be applied if the value of your new mortgage is lower than what you have on your current home.
Another way to reduce the mortgage cost of your new house is to apply for a lower mortgage amount.
Here’s how. Your current home may now have some equity which you can use to fund your new home purchase.
Equity is the difference between the current market value of the property and the amount left to pay off the mortgage secured with the property entirely.
You can convert this equity into cash to fund the purchase of your new property by
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